In the fallout of recent commercial mortgage-backed securities defaults, mortgage servicers have increasingly used receivership sales for commercial real estate assets, including last month’s sale of the Davis Building in downtown Dallas.
Placing a struggling property into receivership has long been a remedy available for lenders, but Texas’ relatively expedited and inexpensive foreclosure process limited the practical value of receiverships and receivership sales. Banks would simply foreclose on a non-performing loan, take back the property, and ultimately sell the asset in a traditional sale.
However, the intricacies of real estate mortgage investment conduit (REMIC) rules governing CMBS loans create difficulties for mortgage servicers that wish to provide seller financing after foreclosing on assets, and many of these hurdles may be overcome with receivership sales.
REMIC rules restrict a special servicer’s ability to 1) modify the existing debt with the existing borrower, or 2) extend new debt to third parties on behalf of the CMBS trust. These restrictions are problematic if a special servicer forecloses on a CMBS loan, because the secured debt is extinguished at foreclosure and the servicer has no ability to offer seller-financing to a new buyer.
However, if the special servicer sells the property out of receivership without foreclosing, the lender may be able to modify the underlying debt if it is assumed by the new borrower at closing. This structure unlocks the value of a struggling CMBS asset in the current market, because it allows the special servicer to extend financing to the purchaser that otherwise may be unavailable in the still-thawing credit markets, allowing the servicer to bring in new capital and a solvent borrower without ever assuming the obligations or potential liabilities of owning the property after a foreclosure sale.
Utilizing a receivership sale can help special servicers convert troubled loans and assets to performing status, thereby increasing the value of their commercial real estate assets. Expect to see an increasing volume of receivership sales, as servicers work through the coming tidal wave of CMBS maturities.
Steven Caufield, an associate at Munsch Hardt Kopf & Harr PCC, focuses on the acquisition, development and management of commercial real estate properties. Contact him at firstname.lastname@example.org.